Competitive Labor Markets Factor Markets Part II (Chapter 18)

Derived Demand for Inputs Product Market 1 Firm in Factor Market T-Shirt Market Low Skilled Workers D2 Price Wages/hr D S MRP2 MRP1 $10 -------------- E1 MFC $200 ------------- Q Qty Qty MRP MRP = MPL * P End Result: ↑ Workers hired Wage rate Unchanged! Demand for product Price of Product MRP = Value of what additional worker produces MRP = MP (input) X Price (output)

When one firm hires more workers => wage rate is unchanged Individual Firms are Wage Takers Entire Factor Market MRP1 MFC1 1 LAW FIRM Entry level Lawyers Wages Qty $160,000 ---------- Q1 E1 1 Company Factor Market (All LAW FIRMS) Entry level Lawyers Wage Rate D1 S $160,000 -------------- E1 ------------- When one firm hires more workers => wage rate is unchanged Q1 Qty When all firms hire more workers => wage rate rises

Supply Curve for Inputs Marginal Factor Cost (MFC) is the supply curve for inputs In labor market MFC = Wage Rate Also called MRC (marginal resource cost) Supply curve for 1 firm MRP MFC Regardless if firms is a monopoly, oligopoly, perfect or monopolistic competition => MFC is horizontal Most firms are competitive in the factor market (input market) the firm has no effect on market price for inputs All 4 market structures are “wage takers” in the labor market. Individual Firms have a horizontal supply curve

Shifts in Demand for Labor MRP shifts right when: Demand for Product ↑ Productivity Rises (MP ↑) Technology, working conditions, etc... Price falls of complementary resource Example: Workers & Machines that work together MRP2 MRPL If Machine price ↓ => Demand for workers ↑

Substitute Resource A substitute input replaces another input: i.e. when machines can replace workers When price of substitute input ↓ => MRPL shift is indeterminate (could ↓ ,↑ or be same) machines workers Labor Market ? MRPL MRP shift is dependent on two opposing effects. Substitution Effect- implies you would hire less workers (MRPL ↓ ) Logic: machines prices fall => hire less workers 2) Output Effect- implies you hire more workers (MRPL ↑ ) Logic: machine prices fall => MC falls => so output increases => hire more workers End result: dominant force determines MRP shift

Competitive Labor Market Worksheet